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Mortgage Bond Revival

Mortgage Bond Revival - Mortgage-backed securities were arguably the eye of the storm in the financial crisis. Though MBS have been around for decades, they grew increasingly risky and complex in recent years, and played a large role in allowing policymakers and investment chiefs around the world to underestimate the size and scope of the housing bubble.

Who in 2007 considered, for example, how large AIG(AIG_) had become, and made the connection between the giant insurer and people who quit their jobs and began flipping houses for a living in places like Arizona and Florida? Highly complex derivatives of mortgage-backed securities, such as collateralized debt obligations (CDOs) and even more complex things known as CDOs squared, were the link.

Some 80% MBS in 2009 and 2010 were issued by government sponsored entities (GSEs), compared to about 20% in 2007, according to Thomson Reuters data. Two of those GSEs, Fannie Mae (FNMA.OB)and Freddie Mac(FMCC.OB) guarantee or own 53% of the $10.7 trillion in U.S. mortgages, according to Bloomberg.

The GSEs, as well as many other private and public entities that bought MBS, are expected to challenge the legality of billions of dollars worth of those securities, on the grounds that they contain mortgages that were sloppily underwritten by banks. Bank of America(BAC), Wells Fargo(WFC_), JPMorgan Chase(JPM_) and Citigroup (C_) each are thought to face billions of dollars worth o potential "putbacks" of mortgages they underwrote and/or serviced improperly.

Mortgage Bond Revival
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